Budget approval key for HK's vibrancy

 

Inflation situation

Local inflation continued to trend down, with the underlying consumer price inflation easing from an average of 5.3% in 2011 and 4.7% in 2012 to 4% in 2013.

 

The underlying inflation rate in the first two months of this year averaged 4%, reflecting the rather modest external price pressures, and the gradual feed-through effect of the notable milder increases in fresh-letting rentals last year on consumer price inflation.

 

The average underlying inflation rate for the year as a whole is forecast to further decline to 3.7%. I shall continue to keep a close watch on the inflation trend and its impact on low-income families.

 

Property market risks

The Government's efforts in land supply are producing results. A total of 71,000 residential flats will be provided in the coming three to four years.

 

Over the past year, the average number of monthly residential property transactions was 3,800 (as at March 2014), far lower than the 6,800 in 2012. The rising trend in property prices notably subdued over the same period, and there was even a slight drop in property prices towards the end of last year. The overall property prices in this February fell by 0.9% when compared with the peak in last August.

 

While the property market has slightly cooled off, we must not lose sight of the risk of a bubble. Overall property prices in this February rose by a cumulative 133% over the trough in 2008.

 

The affordability ratio, that is, the ratio of mortgage payment to household income, still stood high at 54% in the fourth quarter of last year as compared to the long-term average of 48%. This indicates that property prices are still out of tune with the economic situation and people's affordability.

 

I am thankful that this council passed the Stamp Duty (Amendment) Bill 2012 more than a month ago. The introduction of the Buyer's Stamp Duty implies a windfall and a larger surplus this year for the Government.

 

I hope that members will complete the scrutiny of the Stamp Duty (Amendment) Bill 2013 and pass it as soon as possible for the implementation of the doubling of the ad valorem stamp duty rates. The passage of the Bill is also necessary for allowing me to introduce appropriate responsive measures and make timely adjustments.

 

Fiscal sustainability

The Working Group on Long-Term Fiscal Planning published its report in early March, providing a scientific and objective basis for our next move.

 

According to the working group, if government expenditure keeps growing and outpacing economic and revenue growth amid an ageing population and slower economic growth, a structural deficit would be inevitable.

 

The Government's financial position is still healthy in the short term, allowing us to implement the committed initiatives. In the next two to three decades, our economy will continue to have a positive growth, yet at a slackening pace.

 

The Government's revenue will rise with the growth pace of our economy. This implies that we can still afford an increase in the overall government expenditure, so long as the growth in public expenditure is commensurate with that of the economy and government revenue.

 

The Government will proactively follow up the working group's recommendations to cope with the sustained challenges an ageing population poses for public finances.

 

Heeding the warning the working group issued in its report, I hope that the community will now focus on discussing how to prevent the growth of government expenditure from continuously outpacing that of government revenue and the economy.

 

As a responsible government, we shall not subject Hong Kong to any fiscal crisis. To avoid structural deficit, the Government must take a multi-pronged approach.

 

Apart from developing our economy, it should also work on its expenditure, revenue and savings. As a first step, we should start from within the Government.

 

Containing expenditure growth

The working group recommends that public expenditure be controlled at 20% of Gross Domestic Product (GDP) or a comparable level. I agree that this is a suitable level since it can help maintain Hong Kong's competitiveness and ensure that the Government will not over-consume the limited social resources which may impede the development of the private sector.

 

More importantly, government revenue does not generally exceed 20% of GDP.

 

To uphold the principle of ‘keeping the expenditure within the limits of revenues’ as laid down by the Basic Law and maintain fiscal stability, the Government will stay within this target.

 

Of course, the 20% mark should be an indicator for fiscal management rather than a rigid target. Government expenditure growth should be allowed to exceed 20% in individual financial years if necessary.

 

Eight measures

To contain our expenditure growth, the Government will adopt eight specific measures as follows:

* in its internal resource allocation exercises, the Government will strive to contain overall government expenditure growth within the forecast nominal GDP growth rates over the medium term. According to this year's medium range forecast, the growth of government expenditure should be around 5.5% a year between 2015 and 2018;

* we shall ask all government departments to adjust service priorities and re-engineer work procedures to save recurrent expenditure in the coming two to three financial years. The savings will be used to provide new and more targeted services;

* we shall strengthen the mechanism of financial impact assessment. Major new policies proposed should be assessed for their fiscal sustainability for 10 years or longer term before introduction;

* we shall actively identify individual policy areas for fundamental expenditure review to achieve the aim of doing more with less by streamlining procedures or consolidating potentially redundant services;

* we shall consider allocating funding that straddles different financial years to suitable subvented organisations. This will facilitate the organisations’ medium-term service planning and resource deployment, and save the administrative work relating to the submission and vetting of applications every year;

* we shall review procurement procedures and related rules, simplify the provisions of tender documents and reduce unnecessary assessment criteria so as to enhance the efficiency of government procurement without compromising fair competition;

* the Government will adjust the implementation schedules of new works projects as appropriate to prevent an over-concentration of works which will push up the construction cost. We shall exercise tighter cost control over the various stages of projects such as planning, design, tendering and construction to avoid overspending; and

* we shall continue to allocate resources to promote the economy and prepare the community for the ageing population. For better resource allocation and expenditure planning for capital works projects in areas such as developing land, enhancing healthcare and elderly facilities, and improving the environment, the departments concerned will draw up 10-year programmes for major projects to facilitate early preparation in this respect.

 

Preserving the revenue base

To preserve our revenue, we shall ensure that all the money receivable is duly received by the Government in the first place. For example, to prevent revenue loss, the departments concerned will step up tax enforcement to combat tax evasion and avoidance.

 

To stabilise the revenue base, all departments will continue to review their fees and charges according to the 'user-pay' principle.

 

In the medium to long term, we need to explore ways to broaden the revenue base.  Any new taxes will be a subject of controversy requiring thorough consideration.

 

The Government has conducted a number of reviews on tax policies over the past years. For example, set up in 2000, the Advisory Committee on New Broad-based Taxes conducted vast amounts of research on how to broaden tax bases and gauged public views on the issue.

 

Later, in 2006, it launched an extensive consultation on the introduction of a Goods & Services Tax. At that juncture, the public did not accept the Government's introduction of such a new tax.

 

Despite this, members of the community generally agreed during the consultation process that the problems of our narrow tax base should be addressed. They even put forward other options for broadening the revenue base, but did not have any clear inclinations or mainstream views as to which option the Government should adopt.

 

Long-term fiscal challenges loom

Since the working group has alerted us to the long-term fiscal challenges, I am obliged to ensure that the Government will address the fundamental issue of broadening the revenue base at a suitable time in future.

 

After the measures to contain expenditure growth have been finalised, the Financial Services & the Treasury Bureau will revisit previous research and analysis findings and consultation results to explore ways to push forward the tax review, taking into account the working group's projections.

 

I must emphasise that the Government, at the moment, does not have any plan to introduce new taxes to increase revenue. In principle, we keep an open mind on any new taxes.

 

However, in considering the various options on broadening tax revenue in future, we shall have regard to whether the option is effective in broadening the revenue base; fair and in line with the ‘capacity to pay’ principle; and in line with our simple and low tax system.

 

I will keep the community informed of our views and proposals in due course.

 

Saving for the future

On the savings side, the working group recommends that we save for the future having regard to the experience of other economies. Specifically, we can set up a sort of ‘Future Fund’ scheme so that a contingency fund would be available for the next generation should the Government find itself in any fiscal predicament.

 

Given its non-recurrent nature, the Future Fund should not be used on recurrent expenditure.

 

The recommendation of setting up a Future Fund calls for public discussion and consideration. After the Appropriation Bill’s passage, I shall ask the working group to conduct further in-depth studies on the recommendation and put forward specific proposals. I shall also ask it to explore ways to manage government assets in a more proactive and effective manner.

 

Economic development

In the face of an ageing population, we shall address the resultant long-term fiscal challenges not only through the management of public finances, but also by maintaining Hong Kong's economic vibrancy, which is a key element in raising government revenue.

 

The Hong Kong economy operates on market principles and has many competitive advantages, including free flows of information and capital, a simple and low tax regime, provision of an excellent infrastructure and judicial independence.

 

It is incumbent upon the Government to maintain a favourable business environment so that enterprises can capitalise on Hong Kong's tenacity and entrepreneurship for further business growth. We shall also strengthen government to government, or G2G, ties to open up more markets for enterprises.

 

On the development of industries, the four pillar industries employ almost half of the total labour force of Hong Kong and contribute close to 60% of GDP. To help develop a high value-added and knowledge-based economy, we shall promote innovation and technology industries and raise the productivity of all sectors.

 

In parallel, we shall nurture with patience other new industries which have potential to foster economic diversification.

 

Help for SMEs

Small and medium enterprises, or SMEs, are the mainstay of our economy and employment market. They make up over 90% of local enterprises and take on 1.3 million employees.

 

We attach great importance to SMEs’ operating environment, and we shall continue to lend support to these enterprises in financing, market expansion, brand building and productivity enhancement.

 

Because of land and manpower constraints, the Government has put in place measures to increase land supply for commercial and residential uses, and strengthen our human capital in terms of quantity and quality by enhancing the training of local talent and attracting talented people from overseas.

 

Furthermore, the Government will continue to develop our infrastructure to bolster the flow of people, goods, capital and information, reinforcing our position as an international hub.

 

Relief measures

Since the announcement of the Budget, one-off relief measures have once again become a focus of concern. In fact, expenditure on this year's counter-cyclical measures accounts for only 5% of total government expenditure, whereas recurrent expenditure takes up 75%. This one-to-15 ratio shows the obvious difference in importance between the two.

 

Over the years, the Government has been making use of recurrent measures to promote social development and improve people's livelihood. In this year's Budget, I have increased recurrent expenditure by 7.8%, bringing the total recurrent expenditure above the $300 billion level for the first time.

 

These additional resources will be used to provide new services and enhance existing services to meet the needs of all walks of life. Education, healthcare and social welfare together account for almost 60% of recurrent government expenditure. In the coming year, recurrent expenditure on these three areas will exceed $170 billion, an increase of 6.7% over the previous year.

 

With competitiveness as the theme of this year's Budget, I hope that the wide-ranging measures it proposes will help us consolidate Hong Kong's position as an international hub, move our economy up the value-added chain, overcome the development constraints and add impetus to the Hong Kong economy.

 

At the same time, we must also respond to the long-term fiscal challenges brought by an ageing population. It is therefore all the more important for us to maintain strict fiscal discipline as stipulated in Article 107 of the Basic Law by keeping the expenditure within the limits of revenues in drawing up the budget, striving to achieve a fiscal balance and keeping the budget commensurate with the growth rate of GDP.

 

Structural fiscal problems loom on the horizon. We must make longer-term planning to ensure that our policies and measures will be implemented in a way such that we shall be able to maintain fiscal sustainability and remain competitive.

 

Avoid public service disruption 

This year, members have proposed as many as 1,900 amendments. The Government will make every effort to support this council in scrutinising the Budget for its early passage.

 

The funds on account totalling $78.7 billion previously authorised by this Council are sufficient to meet the overall expenditure before the end of May. However, if the Appropriation Bill is not secured earlier, government departments and the public sector will begin to see resources running out in early June and the delivery of public services cannot be maintained.

 

In addition, the Budget initiatives cannot be taken forward without the passage of the Bill.

 

To avoid disruption to public services, maintain the Government's normal operation, and facilitate prompt implementation of the Budget initiatives, I earnestly seek members' support for an early passage of the Appropriation Bill 2014 in the overall interests of the community.

 

Financial Secretary John Tsang gave this address before the Second Reading debate on the Appropriation Bill 2014 in the Legislative Council.